Employment Agreement - Digital Island Inc. and Ruann Ernst
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
-----------------------------------------
AMENDED AND RESTATED EMPLOYMENT AGREEMENT made as of the 15th day of
December 1999 by and between DIGITAL ISLAND, INC. a Delaware corporation (the
"Corporation"), and Ruann Ernst ("Executive").
WHEREAS, the Corporation and Executive have previously entered into a
formal employment contract dated May 20, 1998 in connection with Executive's
commencement of employment with the Corporation (the "Original Contract").
WHEREAS, the Original Contract contained the terms and conditions
applicable to Executive's employment with the Corporation and provided certain
severance benefits for Executive in the event her employment should be
involuntarily terminated.
WHEREAS, the parties now wish to amend and restate the Original
Contract so as to revise certain terms and conditions applicable to Executive's
employment with the Corporation and provide her with enhanced severance benefits
in the event her employment should be involuntarily terminated.
NOW, THEREFORE, the parties hereto agree as follows:
PART ONE - DEFINITIONS
For purposes of this Agreement, the following definitions shall be in
effect:
Average Compensation means the average of the Executive's W-2 wages
from the Corporation for the five (5) calendar years (or such fewer number of
calendar years of employment with the Corporation) completed immediately prior
to the calendar year in which the Change in Control is effected. Any W-2 wages
for a partial year of employment will be annualized, in accordance with the
frequency which such wages are paid during such partial year, before inclusion
in the Executive's Average Compensation.
Board means the Corporation's Board of Directors.
Change in Control means a change in the ownership or control of the
Corporation effected through any of the following transactions:
(i) a merger, consolidation or reorganization approved by the
Corporation's stockholders, unless securities representing more than
------
fifty percent (50%) of the total combined voting power of the
outstanding voting securities of the successor corporation are
immediately thereafter beneficially owned, directly or indirectly and
in substantially the same proportion, by the persons who beneficially
owned the Corporation's outstanding voting securities immediately
prior to such transaction, or
<PAGE>
(ii) any stockholder-approved sale, transfer or other
disposition of all or substantially all of the Corporation's assets in
complete liquidation or dissolution of the Corporation;
(iii) the acquisition, directly or indirectly, by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by or is under common
control with, the Corporation) of beneficial ownership (within the
meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as
amended) of securities possessing more than fifty percent (50%) of the
total combined voting power of the Corporation's outstanding
securities pursuant to a tender or exchange offer made directly to the
Corporation's stockholders; or
(iv) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have
been Board members continuously since the beginning of such period or
(B) have been elected or nominated for election as Board members
during such period by at least a majority of the Board members
described in clause (A) who were still in office at the time the Board
approved such election or nomination.
Code means the Internal Revenue Code of 1986, as amended.
Common Stock means the Corporation's common stock.
Disability means the Executive's inability, by reason of any physical
or mental injury or illness, to substantially perform the services required of
her under this Agreement for a period in excess of one hundred eighty (180)
consecutive days. In such event, Executive shall be deemed to have terminated
employment by reason of such Disability on the last day of such one hundred
eighty (180)-day period.
Fair Market Value means, with respect to the shares of Common Stock
subject to any of the Executive's Options, the closing selling price per share
of Common Stock on the date in question, as such price is reported by the
National Association of Securities Dealers on the Nasdaq National Market and
published in The Wall Street Journal. If there is no closing selling price
-----------------------
reported for the Common Stock on the date in question, then the Fair Market
Value will be the closing selling price on the last preceding date for which
such published report exists.
2
<PAGE>
Involuntary Termination means (i) the Corporation's termination of
Executive's employment for any reason other than a Termination for Cause or (ii)
Executive's voluntary resignation within ninety (90) days following (A) a
material reduction in the scope of her duties and responsibilities or the level
of management to which she reports, (B) a reduction in her level of base salary
or (C) a relocation of her principal place of employment by more than fifty (50)
miles. Involuntary Termination shall not include the termination of Executive's
employment by reason of death or Disability.
Option means any option granted to the Executive under the Plan which
is outstanding either at the time of the Change in Control or upon the
Executive's subsequent Involuntary Termination. The Executive's Options shall be
divided into two (2) separate categories as follows:
Acquisition-Accelerated Options: any Option (or installment
-------------------------------
thereof) which automatically vests as to one or more purchased or
purchasable shares of Common Stock on an accelerated basis, pursuant to the
acceleration provisions of the agreement evidencing that Option, upon a
Change in Control.
Severance-Accelerated Options: any Option (or installment
-----------------------------
thereof) which, pursuant to Part Four of this Agreement, vests as to one or
more purchased or purchasable shares of Common Stock on an accelerated
basis upon an Involuntary Termination within eighteen (18) months after a
Change in Control or upon a voluntary resignation within six (6) months
after the Change in Control.
Option Parachute Payment means, with respect to any Acquisition-
Accelerated Option or any Severance-Accelerated Option, the portion of that
Option deemed to be a parachute payment under Code Section 280G and the Treasury
Regulations issued thereunder. The portion of such Option which is categorized
as an Option Parachute Payment shall be calculated in accordance with the
valuation provisions established under Code Section 280G and the applicable
Treasury Regulations and shall include an appropriate dollar adjustment to
reflect the lapse of the Executive's obligation to remain in the Corporation's
employ as a condition to the vesting of the accelerated installment. In no
event, however, shall the Option Parachute Payment attributable to any
Acquisition-Accelerated Option or Severance-Accelerated Option (or accelerated
installment) exceed the spread (the excess of the Fair Market Value of the
accelerated option shares over the option exercise price payable for those
shares) existing at the time of acceleration.
Other Parachute Payment means any payment in the nature of
compensation (other than the Change in Control benefits to which the Executive
becomes entitled under Part Four of this Agreement) which are made to the
Executive in connection with the Change in Control and which accordingly qualify
as parachute payments within the meaning of Code Section 280G(b)(2) and the
Treasury Regulations issued thereunder. The Executive's Other Parachute Payment
shall include (without limitation) the Present Value, measured as of the Change
in Control, of the Option Parachute Payment attributable to the Executive's
Acquisition-Accelerated Options (if any).
3
<PAGE>
Parachute Payment means any payment or benefit provided Executive
under Part Four of this Agreement (other than the Option Parachute Payment
attributable to the Executive's Severance-Accelerated Options) which is deemed
to constitute a parachute payment within the meaning of Code Section 280G(b)(2)
and the Treasury Regulations issued thereunder.
Plan means (i) the Corporation's 1999 Stock Incentive Plan, as amended
or restated from time to time, and (ii) any successor stock incentive plan
subsequently implemented by the Corporation.
Present Value means the value, determined as of the date of the Change
in Control, of any payment in the nature of compensation to which the Executive
becomes entitled in connection with the Change in Control or her subsequent
Involuntary Termination, including (without limitation) the Option Parachute
Payment attributable to the Executive's Severance-Accelerated Options, the
additional severance benefits to which the Executive becomes entitled under Part
Four of this Agreement and the Option Parachute Payment attributable to the
Executive's Acquisition-Accelerated Options. The Present Value of each such
payment shall be determined in accordance with the provisions of Code Section
280G(d)(4), utilizing a discount rate equal to one hundred twenty percent (120%)
of the applicable Federal rate in effect at the time of such determination,
compounded semi-annually to the effective date of the Change in Control.
Salary Continuation Period means the period for which payment of the
Executive's Base Salary may, pursuant to Part Three or Four of this Agreement,
be continued following an Involuntary Termination of the Executive's employment.
Termination for Cause means the termination of the Executive's
employment for any of the following reasons: (i) Executive's conviction of a
felony or her embezzlement of the Corporation's funds, (ii) a material breach by
Executive of one or more of her obligations under Paragraph 8, 9 or 18 of this
Agreement, (iii) any intentional misconduct by Executive which has a materially
adverse effect upon the Corporation's business or reputation, (iv) Executive's
material dereliction of the major duties, functions and responsibilities of her
executive position after written warning from the Corporation or (v) a material
breach by Executive of any of Executive's fiduciary obligations as an officer of
the Corporation. However, prior to any termination of Executive's employment for
any of the reasons specified in clauses (ii) through (v), the Corporation shall
give written notice to Executive of the actions or omissions deemed to
constitute the grounds for a Termination for Cause, and Executive shall have a
period of sixty (60) days in which to cure the specified default in her
performance.
PART TWO -- TERMS AND CONDITIONS OF EMPLOYMENT
1. Duties and Responsibilities.
---------------------------
A. Executive shall continue to serve as the Chief Executive Officer
of the Corporation and shall in such capacity report directly to the Board. As
Chief Executive Officer, Executive shall have primary responsibility for the
formulation, implementation and execution of
4
<PAGE>
strategic policies relating to the Corporation's business operations, financial
objectives and market growth and shall accordingly have overall responsibility
for the formulation of the business plan for each fiscal year to be submitted
for Board approval. The Corporation shall use its best efforts to maintain
Executive on the Board throughout the remainder of her period of employment with
the Corporation as Chief Executive Officer by taking all action necessary to
nominate Executive for election to the Board at each shareholders meeting held
during her period of service as Chief Executive Officer at which Board members
are to be elected. Effective November 18, 1999, Executive has been appointed
Chairman of the Board. Upon the closing of the Corporation's acquisition of
Sandpiper Networks, Inc., Executive shall cease to hold the title of President
of the Corporation, and the loss of such title and position shall not constitute
grounds for an Involuntary Termination under this Agreement.
B. Executive hereby agrees to remain in her capacity as Chief
Executive Officer during the employment period specified in Paragraph 2 and to
perform in good faith and to the best of her ability all services which may be
required of Executive hereunder and to be available to render services at all
reasonable times and places in accordance with such reasonable directions and
requests made by the Corporation acting by majority vote of the Board.
C. Executive shall, during the term hereof, devote her full time,
ability, energy and skill to the performance of her duties and responsibilities
hereunder. Executive shall be based at the Corporation's principal offices in
the San Francisco/Bay Area, California, but Executive shall be required to
travel to other geographic locations in connection with the performance of her
executive duties hereunder.
2. Period of Employment. Executive's employment with the Corporation
--------------------
shall be governed by the provisions of this Amended and Restated Agreement for
the period commencing October 1, 1999 and continuing until this Agreement is
terminated in accordance with the provisions of Paragraph 10. The period during
which Executive's employment continues in effect shall be hereafter referred to
as the "Employment Period."
3. Cash Compensation.
-----------------
A. Effective March 1, 1999, Executive shall be paid a base salary at
the annual rate of not less than Two Hundred Thousand Dollars ($200,000.00).
Such rate shall be subject to annual review by the Board and may be increased at
the Board's discretion. Base salary shall be paid at periodic intervals in
accordance with the Corporation's payroll practices for salaried employees.
B. For each fiscal year of the Corporation during the Employment
Period, beginning with the fiscal year commencing October 1, 1999, Executive
shall be entitled to incentive compensation in an amount not less than forty
percent (40%) of her base salary which is to become payable in quarterly
installments upon the Corporation's achievement of the financial objectives and
performance milestones mutually agreed upon by the Board and Executive for each
such year.
5
<PAGE>
C. The Corporation shall deduct and withhold from the compensation
payable to Executive hereunder any and all applicable Federal, State and local
income and employment withholding taxes and any other amounts required to be
deducted or withheld by the Corporation under applicable statutes, regulations,
ordinances or orders governing or requiring the withholding or deduction of
amounts otherwise payable as compensation or wages to employees.
4. Equity Compensation
-------------------
A. Executive has received a series of Options over her period of
employment to date with the Corporation. Each of those Options has an exercise
price per share equal to the fair market value per share of the Common Stock on
the grant date, and the shares of Common Stock subject to these Options vest in
installments over Executive's period of service with the Corporation. The
Options granted to date may be summarized as follows:
Grant Date Number of Option Shares Exercise Price
---------- ----------------------- --------------
June 1, 1998 794,159 $1.50 per share
March 18, 1999 250,000 $4.25 per share
November 15, 1999 250,000 $49.438 per share
B. The shares of Common Stock subject to the Options summarized
above, together with each additional Option Executive may subsequently receive
over the remainder of the Employment Period, shall be subject to (i) the vesting
acceleration provisions of Paragraph 11(d) of Part Three in the event there
occur an Involuntary Termination of Executive's employment in the absence of a
Change in Control and (ii) the applicable vesting acceleration provisions of
Paragraph 12 or 13(d) of Part Four in the event there should occur a Change in
Control.
5. Expense Reimbursement. In addition to the compensation specified
---------------------
in Paragraph 3, Executive shall be entitled, in accordance with the
reimbursement policies in effect from time to time, to receive reimbursement
from the Corporation for all business expenses incurred by Executive in the
performance of her duties hereunder, provided Executive furnishes the
--------
Corporation with vouchers, receipts and other details of such expenses in the
form required by the Corporation sufficient to substantiate a deduction for such
business expenses under all applicable rules and regulations of federal and
state taxing authorities.
6. Fringe Benefits.
---------------
A. Executive shall, throughout the Employment Period, be eligible to
participate in all group term life insurance plans, group health plans,
accidental death and dismemberment plans and short-term disability programs and
other executive perquisites which are made available to the Corporation's
executives and for which Executive qualifies.
6
<PAGE>
B. Executive shall accrue paid vacation benefits during the
Employment Period at the rate of one (1) week per calendar quarter and may take
her accrued vacation at such times as are mutually convenient to Executive and
the Corporation.
7. Death or Disability. Upon Executive's death or Disability during
-------------------
the Employment Period, the employment relationship created pursuant to this
Agreement shall immediately terminate, and no further compensation shall become
payable to Executive pursuant to Paragraph 3. In connection with such
termination, the Corporation shall only be required to pay Executive or her
estate (i) any unpaid base salary earned under Paragraph 3 for services rendered
through the date of her death or Disability, (ii) the dollar value of all
accrued and unused vacation benefits based upon Executive's most recent level of
base salary and (iii) any incentive compensation which becomes due and payable
for the fiscal year in which the Executive's death or Disability occurs, pro-
rated in amount on the basis of the portion of that year completed prior to
Executive's death or Disability. No additional shares purchased or purchasable
under any of the Options granted to Executive shall vest following the
termination of the employment relationship by reason of Executive's death or
Disability.
8. Restrictive Covenants. During the Employment Period:
---------------------
(i) Executive shall devote her full time and energy
solely and exclusively to the performance of her duties described herein,
except during periods of illness or vacation periods.
(ii) Executive shall not directly or indirectly provide
services to or through any person, firm or other entity except the
Corporation, unless otherwise authorized by the Board in writing. However,
Executive may continue to serve during the Employment Period as a non-
employee member of the board of directors of any companies for which she so
serves on the effective date of this Amended and Restated Agreement and may
join the board of directors of other companies in the future with the
Board's consent.
(iii) Executive shall not render any services of any kind
or character for her own account or for any other person, firm or entity
without first obtaining the Corporation's written consent.
However, Executive shall have the right to perform such incidental
services as are necessary in connection with (a) Executive's private passive
investments, but only if Executive is not obligated or required to (and shall
not in fact) devote any managerial efforts which interfere with the services
required to be performed by her hereunder, or (b) Executive's charitable or
community activities, or participation in trade or professional organizations,
but only if such incidental services do not interfere with the performance of
Executive's services hereunder.
7
<PAGE>
9. Proprietary Information.
-----------------------
A. Executive hereby acknowledges that the Corporation may, from time
to time during the Employment Period, disclose to Executive confidential
information pertaining to the Corporation's business and affairs, technology,
research and development projects and customer base, including (without
limitation) financial information concerning customers and prospective business
opportunities. All information and data, whether or not in writing, of a private
or confidential nature concerning the business, technology or financial affairs
of the Corporation and its clients (collectively, "Proprietary Information") is
and shall remain the sole and exclusive property of the Corporation. By way of
illustration, but not limitation, Proprietary Information shall include all
trade secrets, research and development projects, financial records, business
plans, personnel data, computer programs and customer lists and accounts
relating to the business operations, technology or financial affairs of the
Corporation, other similar items indicating the source of the Corporation's
revenue, all information pertaining to the salaries, duties and performance
ratings of the Corporation's employees and all financial information relating to
the Corporation's clients and their proposed or contemplated business
transactions.
B. Executive shall not, at any time during or after such Employment
Period, disclose to any third party or directly or indirectly make use of any
such Proprietary Information, other than in connection with the Corporation's
business and affairs.
C. All files, letters, memoranda, reports, records, data or other
written, reproduced or other tangible manifestations of the Proprietary
Information, whether created by Executive or others, to which the Executive has
access during the Employment Period shall be used by Executive only in the
performance of her duties hereunder. All such materials (whether written,
printed or otherwise reproduced or recorded) shall be returned by Executive to
the Corporation immediately upon the termination of the Employment Period or
upon any earlier request by the Corporation, without Executive retaining any
copies, notes or excerpts thereof.
D. Executive's obligation not to disclose or use Proprietary
Information shall also extend to any and all information, records, trade
secrets, data and other tangible property of the Corporation clients or any
other third parties who may have disclosed or entrusted the same to the
Corporation or Executive in connection with the Corporation's business
operations.
E. Executive's obligations under this Paragraph 9 shall continue in
effect after the termination of her employment with the Corporation, whatever
the reason or reasons for such termination, and the Corporation shall have the
right to communicate with any future or prospective employer of Executive
concerning Executive's continuing obligations under this Paragraph 9.
8
<PAGE>
10. Termination of Employment.
-------------------------
A. The Corporation, acting by majority vote of the Board, may
terminate Executive's employment under this Agreement at any time for any
reason, with or without cause, by giving at least sixty (60) days prior written
notice of such termination to the Executive. If such termination notice is given
to Executive, the Corporation may, if it so desires, immediately relieve
Executive of some or all of her duties. In no event shall such sixty (60)-day
notice requirement be applicable to a Termination for Cause under Paragraph C
below.
B. Executive may terminate her employment under this Agreement at
any time by giving the Corporation at least sixty (60) days prior written notice
of such termination.
C. The Corporation, acting by majority vote of the Board, may at any
time, upon written notice, discharge the Executive from employment with the
Corporation hereunder pursuant to a Termination for Cause. Such termination
shall be effective immediately upon such notice.
D. Upon the termination of Executive's employment for any reason
during the Employment Period, Executive shall be paid all salary and unused
vacation earned through the date of such termination.
E. If Executive's employment terminated by reason of a Termination
for Cause or should Executive voluntarily resign from employment (other than in
connection with an event which constitutes grounds for an Involuntary
Termination), then (except as otherwise provided in Paragraph 12) all vesting in
Executive's outstanding Options and unvested shares shall cease at the time of
such termination, and Executive shall not have more than a three (3)-month
period (twelve (12)-months in the event of death or Disability) following the
termination of her employment in which to exercise any outstanding Options for
the shares of the Corporation's common stock which are vested and exercisable at
the time of such termination of employment.
PART THREE - SEVERANCE BENEFITS
Should the Executive's employment with the Corporation terminate by
reason of an Involuntary Termination in the absence of a Change in Control or
more than eighteen (18) months after a Change in Control, then the Executive
shall become entitled to receive the severance benefits provided under this Part
Three. Such benefits shall be in lieu of any other severance benefits to which
Executive might otherwise be entitled by reason of her termination of
employment.
11. Nature of Severance Benefits. The severance benefits payable to
----------------------------
Executive under this Part Three shall consist of the following:
9
<PAGE>
(a) Salary Continuation. Executive shall receive salary
-------------------
continuation payments, at the monthly rate of base salary in effect for her
under Paragraph 3 at the time of her Involuntary Termination, for a period of
twelve (12) months. Such salary continuation payments shall be made at semi-
monthly intervals on the 15th and last day of each calendar month and shall be
subject to all applicable withholding requirements as set forth in Paragraph
3.D.
(b) Incentive Compensation. Executive shall be entitled to
----------------------
fifty percent (50%) of the dollar amount of any incentive compensation which
would have actually become payable to her on the basis of the Corporation's
financial performance for the fiscal year in which such Involuntary Termination
occurs, had she continued in the Corporation's employ through the end of that
fiscal year. Payment shall be made in quarterly installments at the same time as
incentive bonuses are paid quarterly to active executives of the Corporation
during such fiscal year.
(c) Health Care Coverage. Continued health care coverage under
--------------------
the Corporation's medical plan shall be provided, without charge, to Executive
and her eligible dependents upon her election to receive such continued health
care coverage under Internal Revenue Code Section 4980B ("COBRA"). Such
Corporation-paid coverage shall continue until the earlier of (i) the expiration
-------
of the twelve (12)-month period measured from the effective date of her
Involuntary Termination or (ii) the first date on which Executive is covered
under another employer's health benefit program without exclusion for any pre-
existing medical condition. Any additional health care coverage to which
Executive and her dependents may be entitled under COBRA following the period of
such Corporation-paid coverage shall be at Executive's sole cost and expense.
(d) Partial Option Acceleration. The vesting schedule in
---------------------------
effect for the shares of Common Stock purchased or purchasable under each of the
Executive's Options shall be accelerated by an additional twelve (12) months so
that Executive shall immediately vest in that number of additional shares
purchased or purchasable under each such Option equal to the number of
additional shares in which Executive would have vested under the normal vesting
schedule in effect for that Option had Executive actually rendered an additional
twelve (12) months of service with the Corporation prior to the date of her
Involuntary Termination. Executive shall have until the earlier of (i) the
-------
expiration of the option term or (ii) the end of the three (3)-month period
following the date of such Involuntary Termination in which to exercise her
Options for any or all of the option shares in which Executive is vested at the
time of her Involuntary Termination, including the option shares which vest on
an accelerated basis in accordance with the foregoing provisions of this
subparagraph (d).
PART FOUR - CHANGE IN CONTROL BENEFITS
This Part Four sets forth certain Change in Control Benefits to which
Executive may become entitled. Paragraph 12 specifies the benefits to which
Executive may become entitled upon the Change in Control or upon her subsequent
resignation (other than in connection with an event which constitutes ground for
an Involuntary Termination) within six (6) months after that Change in Control.
Should Executive's employment with the Corporation terminate
10
<PAGE>
by reason of an Involuntary Termination within eighteen (18) months after a
Change in Control, then the Executive shall become entitled to receive the
severance benefits provided under Paragraph 13. However, the Executive's
benefits under this Part Four shall in all events be subject to the benefit
limitations of Part Five and the restrictive covenants of Part Six of this
Agreement and shall be in lieu of all other severance benefits to which the
Executive might otherwise be entitled by reason of such termination of her
employment.
12. Certain Change in Control Benefits. Should a Change in Control
----------------------------------
occur in which the Executive's Options are not assumed by the successor entity
or otherwise continued in effect pursuant to the terms of the Change in Control
transaction and the Corporation's outstanding repurchase rights with respect to
unvested shares terminate, then the shares of Common Stock purchased or
purchasable under each of the Executive's Options shall immediately vest, and
each of the Executive's outstanding Options shall become exercisable,
immediately prior to that Change in Control, for all the shares of Common Stock
at the time subject to those Options and may be exercised for any or all of
those shares as fully-vested shares of Common Stock. Should such Options be
assumed by the successor entity or otherwise continued in effect (together with
any outstanding repurchase rights for unvested shares) pursuant to the terms of
the Change in Control transaction so that the shares of Common Stock purchased
or purchasable under those Options do not vest at the time of the Change in
Control and Executive voluntarily resign from employment (other than in
connection with an event which constitutes grounds for an Involuntary
Termination) within six (6) months after the effective date of that Change in
Control, then Executive shall immediately be credited with an additional
twenty-four (24) months of service under the vesting schedule in effect for the
shares purchased or purchasable under each Option. Accordingly, Executive
shall immediately vest in that number of additional shares purchased or
purchasable under each such Option equal to the number of additional shares in
which Executive would have vested under the normal vesting schedule in effect
for that Option had Executive actually rendered an additional twenty-four (24)
months of service with the Corporation prior to the date of such voluntary
resignation. For each outstanding Option granted Executive after September 30,
1999, Executive shall have until the earlier of (i) the expiration of the one
-------
(1)-year period measured from the date of such resignation or (ii) the
expiration date of the option term in which to exercise the Option for any or
all of the option shares in which Executive is vested at the time of her
resignation, including the option shares which vest on an accelerated basis in
accordance with the foregoing provisions. For any other Option, Executive shall
have until the earlier of (i) the expiration of the option term or (ii) the end
-------
of the three (3)-month period following the date of such resignation in which to
exercise her options for any or all of the option shares in which Executive is
vested at the time of her resignation, including the option shares which vest on
an accelerated basis in accordance with the foregoing provisions.
13. Involuntary Termination Benefits. The severance benefits payable
--------------------------------
to Executive under this Part Four in the event her employment with the
Corporation should terminate by reason of an Involuntary Termination within
eighteen (18) months after a Change in Control shall consist of the following:
11
<PAGE>
(a) Salary Continuation. Executive shall receive salary
-------------------
continuation payments, at the monthly rate of base salary in effect for her
under Paragraph 3 at the time of her Involuntary Termination, for a period of
twelve (12) months. Such salary continuation payments shall be made at semi-
monthly intervals on the 15th and last day of each calendar month and shall be
subject to all applicable withholding requirements as set forth in Paragraph
3.D.
(b) Incentive Compensation. Executive shall be entitled to
----------------------
fifty percent (50%) of the dollar amount of any incentive compensation which
would have actually become payable to her on the basis of the Corporation's
financial performance for the fiscal year in which such Involuntary Termination
occurs, had she continued in the Corporation's employ through the end of that
fiscal year. Payment shall be made in quarterly installments at the same time as
incentive bonuses are paid quarterly to active executives during such fiscal
year.
(c) Health Care Coverage. Continued health care coverage under
--------------------
the Corporation's medical plan shall be provided, without charge, to Executive
and her eligible dependents upon her election to receive such continued health
care coverage under Internal Revenue Code Section 4980B ("COBRA"). Such
Corporation-paid coverage shall continue until the earlier of (i) the expiration
-------
of the twelve (12)-month period measured from the effective date of her
Involuntary Termination or (ii) the first date on which Executive is covered
under another employer's health benefit program without exclusion for any pre-
existing medical condition. Any additional health care coverage to which
Executive and her dependents may be entitled under COBRA following the period of
such Corporation-paid coverage shall be at Executive's sole cost and expense.
(d) Option Acceleration. To the extent the shares of Common
-------------------
Stock purchased or purchasable under the Executive's Options do not vest on an
accelerated basis at the time of the Change in Control because those Options are
assumed by the successor entity or otherwise continued in effect following that
Change in Control (together with any repurchase rights applicable to the
unvested shares), then those shares (or any successor securities in the Change
in Control) shall immediately vest upon an Involuntary Termination of
Executive's employment with the Corporation (or the successor entity) within
eighteen (18) months after the effective date of that Change in Control, and
each of the Executive's outstanding Options shall immediately become exercisable
for all of the option shares as fully-vested shares. For each Option granted
Executive after September 30, 1999, Executive shall have until the earlier of
-------
(i) the expiration of the one (1)-year period measured from the date of such
Involuntary Termination or (ii) the expiration date of the option term in which
to exercise the Option for any or all of the option shares as fully-vested
shares. For any other Option, Executive shall have until the earlier of (i) the
-------
expiration of the option term or (ii) the end of the three (3)-month period
following the date of such Involuntary Termination in which to exercise her
options for any or all of the option shares as fully-vested shares.
12
<PAGE>
PART FIVE - BENEFIT LIMITATION
14. Benefit Limitation. The aggregate Present Value (measured as of
------------------
the Change in Control) of the severance benefits to which the Executive becomes
entitled under Paragraph 13 at the time of her Involuntary Termination (namely,
the salary continuation payments, the incentive bonus, the continued health care
coverage and the Option Parachute Payment attributable to the Severance-
Accelerated Options) or the Option Parachute Payment attributable to any
Severance-Accelerated Options to which she becomes entitled under Paragraph 12
shall in no event exceed in amount the greater of the following dollar amounts
-------
(the "Benefit Limit"):
(a) 2.99 times the Executive's Average Compensation, less the
Present Value, measured as of the Change in Control, of all Other Parachute
Payments to which the Executive is entitled, or
(b) the amount which yields the Executive the greatest after-tax
amount of benefits under Part Four of this Agreement after taking into
account any excise tax imposed under Code Section 4999 on the payments and
benefits which are provided to Executive under Part Four or which
constitute Other Parachute Payments.
The Option Parachute Payment attributable to the accelerated vesting
of the Executive's Acquisition-Accelerated Options at the time of the Change in
Control shall also be subject to the Benefit Limit.
For purposes of applying the Benefit Limit to the Executive's
severance benefits under Part Four, the value of her consulting agreement under
Paragraph 17 and her non-competition covenant under Paragraph 18 shall be
determined by independent appraisal by a nationally-recognized independent
accounting firm acceptable to both the Executive and the Corporation, and a
portion of her severance benefits shall, to the extent of such appraised value,
be specifically allocated as reasonable compensation for the consulting
agreement and non-competition covenant.
15. Resolution Procedure. In the event there is any disagreement
--------------------
between the Executive and the Corporation as to whether one or more payments to
which the Executive becomes entitled in connection with either the Change in
Control or her subsequent Involuntary Termination constitute Parachute Payments,
Option Parachute Payments or Other Parachute Payments or as to the determination
of the Present Value of any of those payments, such dispute shall be resolved as
follows:
(i) In the event temporary, proposed or final Treasury
Regulations in effect at the time under Code Section 280G (or applicable
judicial decisions) specifically address the status of any such payment or
the method of valuation therefor, the characterization afforded to such
payment by the Regulations (or such decisions) shall, together with the
applicable valuation methodology, be controlling.
13
<PAGE>
(ii) In the event Treasury Regulations (or applicable judicial
decisions) do not address the status of any payment in dispute, the matter
shall be submitted for resolution to independent tax counsel mutually
acceptable to the Executive and the Corporation ("Independent Counsel").
The resolution reached by Independent Counsel shall be final and
controlling; provided, however, that if in the judgment of Independent
--------
Counsel the status of the payment in dispute can be resolved through the
obtainment of a private letter ruling from the Internal Revenue Service, a
formal and proper request for such ruling shall be prepared and submitted
by Independent Counsel, and the determination made by the Internal Revenue
Service in the issued ruling shall be controlling. All expenses incurred
in connection with the retention of Independent Counsel and (if applicable)
the preparation and submission of the ruling request shall be shared
equally by the Executive and the Corporation.
(iii) In the event Treasury Regulations (or applicable judicial
decisions) do not address the appropriate valuation methodology for any
payment in dispute, the Present Value thereof shall, at the Independent
Counsel's election, be determined through an independent third-party
appraisal, and the expenses incurred in obtaining such appraisal shall be
shared equally by the Executive and the Corporation.
16. Reduction of Benefits. Once the requisite determinations under
---------------------
Paragraph 15 have been made, then to the extent the aggregate Present Value,
measured as of the Change in Control, of (i) the Option Parachute Payment
attributable to the Severance-Accelerated Options (or installments thereof) plus
(ii) the Parachute Payment attributable to the Executive's other benefit
entitlements under Part Four of this Agreement would, when added to the Present
Value of all of the Executive's Other Parachute Payments (including the Option
Parachute Payment attributable to any Acquisition-Accelerated Options), exceed
the Benefit Limit, the following reductions shall be made to the Executive's
severance benefits under Part Four of this Agreement, to the extent necessary to
assure that such Benefit Limit is not exceeded: first, the Executive's salary
------
continuation payments and incentive bonus payment shall be reduced, and then the
----
period of her continued health care coverage shall will be shortened. To the
extent such Benefit Limit is still exceeded following such reductions, then the
number of shares purchased or purchasable under the Options which are to vest on
an accelerated basis pursuant to Part Four (based on the amount of the Option
Parachute Payment attributable to each Option) shall be reduced to the extent
necessary to eliminate such excess.
PART SIX -- CONSULTING SERVICES
AND SPECIAL RESTRICTIVE COVENANTS
17. Consulting Services. In consideration for the severance benefits
--------------------
to which the Executive's becomes entitled under Part Four of this Agreement
following her Involuntary Termination within (18) months after a Change in
Control or her voluntary resignation within six (6) months after a Change in
Control, she shall make herself available during the Salary Continuation Period
to render such consulting services to the Corporation within her area of
14
<PAGE>
expertise as may reasonably be requested by the Board, but in no event may more
than twenty (20) hours of such services be required of the Executive per month.
Should the nature of the assignment require more than such maximum number of
hours, then the Executive shall be entitled to be compensated for any additional
hours she agrees to commit to the project, with such compensation to be at the
hourly rate established with the Corporation at the time the consulting services
are to be rendered. Executive shall also be entitled to reimbursement from the
Corporation of all reasonable out-of-pocket expenses she incurs in rendering her
consulting services hereunder, with such reimbursement to made within twenty
(20) days after her submission of the appropriate invoices and other
documentation for those expenses.
18. Restrictive Covenants. During the Employment Period and for an
---------------------
additional period of two (2) years following the termination of Executive's
employment for any reason other than death, Executive shall be subject to the
following restrictive covenants:
(i) Executive shall not, within the United States of America or
within a fifty (50)-mile radius of any other area in which the Corporation
is conducting business, directly or indirectly own, manage, operate, join,
control or participate in the ownership, management, operation or control
of (including, without limitation, service as a member of the board of
directors or other governing entity), or be employed by or connected in any
manner with, any enterprise which is engaged in any business or enterprise
providing goods or services competitive with or similar to the goods and
services provided by the Corporation either during the Employment Period or
at the time Executive's employment terminates or which the Corporation is
at that time planning to provide in accordance with business plans adopted
by the Board during Executive's period of employment with the Corporation.
However, such restriction shall not apply to any passive investment
representing an interest of less than two percent (2%) of an outstanding
class of publicly-traded securities of any corporation or other enterprise
which is not, at the time of such investment, engaged in a business
competitive with the Corporation's business. For purposes of this
covenant, the following entities (together with their successors) shall
specifically be deemed to be enterprises engaged in businesses competitive
with the Corporation: Exodus Communications, Inc., Akamai Technologies,
Inc. and MCI WorldCom, Inc.
(ii) Executive shall not directly or indirectly encourage or
solicit any of the Corporation's employees to leave the Corporation's
employ for any reason or interfere in any other manner with employment
relationships at the time existing between the Corporation and its
employees.
15
<PAGE>
(iii) Executive shall not directly or indirectly solicit
any customer, vendor, supplier, licensor, licensee or other business
affiliate of the Corporation or otherwise induce any such person to
terminate its existing business relationship with the Corporation or
interfere in any other manner with any existing business relationship
between the Corporation and any customer, vendor, supplier, licensor,
licensee or other business affiliate.
Executive hereby acknowledges that monetary damages may not be
sufficient to compensate the Corporation for any economic loss which may be
incurred by reason of her breach of the foregoing non-competition covenants.
Accordingly, in the event of any such breach, the Corporation shall, in addition
to the termination of this Agreement and any remedies available to the
Corporation at law, be entitled to obtain equitable relief in the form of an
injunction precluding Executive from continuing such breach.
PART SEVEN -- MISCELLANEOUS PROVISIONS
19. Cessation of Severance Benefits. In the event Executive breaches
-------------------------------
any of her obligations under Paragraph 8, 9, 17 or 18 of this Agreement, she
shall cease to be entitled to any further severance benefits under Part Three or
Four of this Agreement, including (without limitation) any subsequent right to
exercise any outstanding Options or to receive any further salary continuation
payments or continued health care coverage at the Corporation's expense.
20. Death. Should Executive die before she receives the full amount
-----
of salary continuation payments to which she may become entitled under Part
Three or Four of this Agreement, then the balance of such payments shall be
made, on the due dates hereunder had Executive survived, to the executors or
administrators of her estate.
21. Successors and Assigns. The provisions of this Agreement shall
----------------------
inure to the benefit of, and shall be binding upon, the Corporation, its
successors and assigns, and the Executive, the personal representative of her
estate and her heirs and legatees.
22. General Creditor Status. The benefits to which Executive may
-----------------------
become entitled under Part Three or Four of this Agreement shall be paid, when
due, from the Corporation's general assets, and no trust fund, escrow
arrangement or other segregated account shall be established as a funding
vehicle for such payments. Accordingly, Executive's right (or the right of the
executors or administrators of Executive's estate) to receive such benefits
shall at all times be that of a general creditor of the Corporation and shall
have no priority over the claims of other general creditors.
23. Notices.
-------
A. Any and all notices, demands or other communications required or
desired to be given hereunder by any party shall be in writing and shall be
validly given or made to another party if served either personally or if
deposited in the United States mail, certified or registered, postage prepaid,
return receipt requested. If such notice, demand or other communication shall
be served personally, service shall be conclusively deemed made at the
16
<PAGE>
time of such personal service. If such notice, demand or other communication is
given by mail, such notice shall be conclusively deemed given forty-eight (48)
hours after the deposit thereof in the United States mail addressed to the party
to whom such notice, demand or other communication is to be given as hereinafter
set forth:
To the Corporation: Digital Island Corporation
45 Fremont Street
Suite 1200
San Francisco, California 94105
Attention: Charles Bass
To Executive: Ruann Ernst
28525 Matadero Creek Lane
Los Altos Hills, CA 94022
B. Any party hereto may change its address for the purpose of
receiving notices, demands and other communications as herein provided by a
written notice given in the manner aforesaid to the other party hereto.
24. Governing Document. This Agreement constitutes the entire
------------------
agreement and understanding of the Corporation and Executive with respect to the
terms and conditions of Executive's employment with the Corporation and the
payment of severance benefits and supersedes all prior and contemporaneous
written or verbal agreements and understandings between Executive and the
Corporation relating to such subject matter, including (without limitation) the
Employment Agreement between the parties dated May 20, 1998. This Agreement may
only be amended by written instrument signed by Executive and an authorized
officer of the Corporation. Any and all prior agreements, understandings or
representations relating to the Executive's employment with the Corporation are
hereby terminated and cancelled in their entirety and are of no further force or
effect.
25. Governing Law. The provisions of this letter agreement will be
-------------
construed and interpreted under the laws of the State of California applicable
to agreements executed and to be wholly performed within the State of
California. If any provision of this Agreement as applied to any party or to any
circumstance should be adjudged by a court of competent jurisdiction to be void
or unenforceable for any reason, the invalidity of that provision shall in no
way affect (to the maximum extent permissible by law) the application of such
provision under circumstances different from those adjudicated by the court, the
application of any other provision of this Agreement, or the enforceability or
invalidity of this Agreement as a whole. Should any provision of this Agreement
become or be deemed invalid, illegal or unenforceable in any jurisdiction by
reason of the scope, extent or duration of its coverage, then such provision
shall be deemed amended to the extent necessary to conform to applicable law so
as to be valid and enforceable or, if such provision cannot be so amended
without materially altering the intention of the parties, then such provision
will be stricken and the remainder of this Agreement shall continue in full
force and effect.
17
<PAGE>
26. Remedies. All rights and remedies provided pursuant to this
--------
Agreement or by law shall be cumulative, and no such right or remedy shall be
exclusive of any other. A party may pursue any one or more rights or remedies
hereunder or may seek damages or specific performance in the event of another
party's breach hereunder or may pursue any other remedy by law or equity,
whether or not stated in this Agreement.
27. Arbitration. Any and all disputes between Executive and the
-----------
Corporation which arise out of Executive's employment under the terms of this
Agreement or the termination of such employment shall be resolved through final
and binding arbitration. This shall include, without limitation, disputes
relating to this Agreement, Executive's employment by the Corporation or the
termination thereof, claims for breach of contract or breach of the covenant of
good faith and fair dealing, and any claims of discrimination or other claims
under Title VII of the Civil Rights Act of 1964, the Age Discrimination in
Employment Act, the Americans With Disabilities Act, the California Fair
Employment and Housing Act, or any other federal, state or local law or
regulation now in existence or hereinafter enacted and as amended from time to
time concerning in any way the subject of Executive's employment with the
Corporation or its termination. The only claims not covered by this Agreement
---
are claims for benefits under the workers' compensation or unemployment
insurance laws, which will be resolved pursuant to those laws. Binding
arbitration will be conducted in San Francisco, California in accordance with
the rules and regulations of the American Arbitration Association. Each party
will split the cost of the arbitration filing and hearing fees, and the cost of
the arbitrator; each side will bear its own attorneys' fees, that is, the
arbitrator will not have authority to award attorneys' fees, unless a statutory
------
section at issue in the dispute authorizes the award of attorneys' fees to the
prevailing party, in which case the arbitrator has authority to make such award
as permitted by the statute in question. Executive understands and agrees that
the arbitration shall be instead of any civil litigation and that this means
that she is waiving her right to a jury trial as to such claims. The parties
further understand and agree that the arbitrator's decision shall be final and
binding to the fullest extent permitted by law and enforceable by any court
having jurisdiction thereof.
28. Counterparts. This Agreement may be executed in more than one
------------
counterpart, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
18
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amended and
Restated Employment Agreement as of the day and year written above.
DIGITAL ISLAND CORPORATION
By: ____________________________________
Title: _________________________________
_________________________________________
RUANN ERNST, EXECUTIVE
19